Monopolistic Market and Price and Output Determination in it

 

It refers to the mixed market structure of the perfect competition and monopoly. It is the market structure with large number of sellers with product differentiation but closed substitutes and free entry and exists of firms are present. Since, each firm under the monopolistic competition does not produce the homogeneous product, the firm combine together to form a group.

Features of Monopolistic Market:
a.      There is large number of buyers and sellers in a group.
b.     There is product differentiation but are closed substitutes.
c.      There is free entry and exit of the firms in the group.
d.     The prices of the factors and technology are given.
e.      The main objective of the firm is profit maximization both in the short-run and long-run.
f.       The AR is highly price elastic and hence, flatter.

Equilibrium Conditions under Monopolistic Competition

The firms under monopolistic competition market attains the equilibrium position when:

a.      MC=MR

b.     MC cuts MR from below.

Short-Run Equilibrium

Under the monopolistic competition market, a firm in the short run can operate in abnormal profit, normal profit or loss. If the demand conditions for the product of a firm is favorable then it operates in the profit and if the demand condition is unfavorable, it operates in loss.

Long-Run Equilibrium

All the firms under the monopolistic market operate in normal profit in the long-run. In the long-run, the firms in loss leave the group whereas if there is abnormal profit, due to the free entry into the groups, the supply of product increases causing fall in the price which wipes out the abnormal profit and maintain equilibrium in the normal profit.